The County General Fund maintains a Reserve for Contingencies which was established through the Strategic Financial Plan (SFP) process. The target amount for this reserve is 15% of ongoing annual general purpose revenues (excludes fund balance available and one-time amounts and transfers), or $91,446. This compares to the Government Finance Officers Association GFOA) guidelines for funding contingencies at 15% or higher. The June 30, 2011 balance is $61,300, approximately $30,146 below the revised target.

Unallocated Fund Balance Available is generally referred to as day to day check-book-cash. The County knows the Treasurer has the right to recover his costs from investing the school, county and others deposits. Since the schools are more than 50% of the Treasurer’s deposits, they were entitled to more than 50% of the multi-million dollar budget savings achieved during the former Treasurer’s term. The County must have been so desperate to not report an even worse audited financial statement, they skimmed all the budget savings and transferred it to County Reserves.

The lawsuit against the County was filed by the California Department of Finance and the State Associations of Community Colleges in Orange County Superior Court, just across the street from the County offices. The suit alleges the county has taken “the extraordinary step of flouting the law and illegally redirecting property tax revenue payments from schools and community colleges to the county’s own general fund.” The plaintiffs are demanding the court order the Defendant County to return the money to its rightful owners.

While the county has been proactive in discussing this issue with legislators and school officials, the Department of Finance and Attorney General’s office have made no contact with the county regarding this matter. The county is disappointed the state has now resorted to filing a lawsuit. We are evaluating the merits of their suit and cannot comment on its specifics at this time until we have had time to completely review their claims.

For the last six months Orange County has used the schools’ and community college’s cash to bolster their backstop their dwindling cash and reserves. The local schools have tried to avoid the ruinous cost of litigation by accepting a guarantee from the County that at some point in the future, the County would lend them money at no interest cost. But with the State and the Community Colleges both suing the County, there is a high probability that the Court is going to require the $73.5 million be transferred from the County to a bank trust account for safe-keeping.

Orange County’s payroll is $65 million every two weeks. The loss of the schools’ money, higher pension costs and restrictions against skimming County accounts present real risks to Orange County’s cash position. Litigation will eventually require document discovery and depositions? It will be fascinating to see how Orange County tries to spin their precarious financial position.

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